A federal whistleblower complaint alleges that a major California insurer failed to pay an estimated $89 million in taxes on premium revenue as required under the Affordable Care Act.
The complaint (PDF) against Blue Shield of California focuses on the taxation of certain health plans that are funded by both an employer and insurer. It could spark more scrutiny by federal officials into whether all insurers are paying their fair share of taxes on premiums.
The ACA’s health insurance tax is one of several fees designed to help fund the health law. Employers’ self-funded plans are exempt from this ACA tax. But traditional plans, in which health insurers are fully responsible for paying medical claims in exchange for premiums, are subject to the tax.
At issue in this case is whether Blue Shield should have paid ACA taxes on hybrid, or “flex-funded,” plans, in which employers pay claims out of their own pocket up to a point and the insurance company covers the rest. Such plans account for a modest share of the insurance market.
The whistleblower in the Blue Shield complaint is Michael Johnson, a public policy director at the company until 2015, when he left and became an outspoken critic of the company.
“Blue Shield appears to have skipped out on $89 million in health reform taxes in 2016, and it’s poised to do the same every year going forward,” Johnson said.
In July 2016, the San Francisco-based insurer made a significant change to its annual tax filing required by the ACA, federal records show. Blue Shield amended its initial filing from three months earlier and made a 25% reduction in its reported premiums, or $3.1 billion less.
Johnson cited those public Internal Revenue Service filings and other information he learned as a Blue Shield employee in his Jan. 30 whistleblower complaint. He shared parts of his complaint with California Healthline.
Johnson worked at Blue Shield for 12 years before leaving in March 2015. Soon after, he launched a public campaign against Blue Shield, accusing the nonprofit of shortchanging the public by operating too much like its for-profit competitors. Blue Shield sued Johnson in 2015 for breach of contract, accusing him of disclosing confidential company information. Johnson is seeking to have the case dismissed in state court.
In a statement, Blue Shield said it has complied with ACA rules. The company said it amended its IRS filing because some revenue from flex-funded plans, also known as minimum-premium plans, represents service fees, rather than insurance premiums. Overall, the company said, its customers benefit because its tax savings result in lower insurance costs.
Some health-policy experts said they couldn’t comment directly on Blue Shield’s situation but were skeptical that flex-funded plans could avoid ACA taxes altogether.
“If the full payment for minimum-premium plans are booked as premium revenue [by the insurer], I would think that they would have to pay the tax. There is no exclusion in the law that I am aware of,” said Glenn Giese, an actuary at the Oliver Wyman consulting firm in Milwaukee.
But views differ within the insurance industry. A spokesman for industry giant Cigna Corp. said that flex-funded or minimum-premium plans are subject to ACA taxes.
Anthem Blue Cross, the nation’s second-largest health insurer, disagrees. In a company fact sheet on ACA taxes, it said “minimum premium products should be considered self-funded [by employers and] will not be subject to the ACA insurer fee.”
In 2014, the first year of the ACA rollout, the federal government collected $8 billion in taxes from insurers, and the amount increases annually. Health insurers collectively will pay $14.3 billion in taxes this year.
Congress has suspended the ACA tax twice, for 2017 and 2019, in response to persistent lobbying from businesses and insurers who want it permanently repealed. Critics say it drives up premiums for employers and consumers at a time when health costs are already too high.
The IRS Whistleblower Office acknowledged receipt of Johnson’s complaint in a Feb. 22 letter and said “we will evaluate the information you provided to determine if an investigation is warranted and an award is appropriate.”
If the IRS uses the information provided by a whistleblower, it can award the person up to 30% of the additional taxes and penalties collected. A spokesman for the IRS declined to comment further, saying the agency can’t discuss specific cases.
In 2016, Blue Shield paid $196 million in ACA premium taxes. However, in his complaint, Johnson said Blue Shield should have paid an additional $55.4 million related to flex-funded plans.
Johnson also contended that his former employer underpaid its ACA taxes by $33.7 million in connection to its acquisition of Care1st, a for-profit Medicaid insurer, in 2015.
Under the ACA, nonprofit insurers that derive at least 80% of their gross revenue from government programs are exempt from the health insurance tax. But Johnson said a company can’t cut its taxes through a transaction that has no other “substantial purpose” besides the tax implications.
Blue Shield said the conversion of Care1st to nonprofit status wasn’t driven by tax considerations.